Sen. Ann Rest at center of tax reform debate

Published December 31, 2012 at 2:01 pm

Ann Rest

by T.W. Budig ECM Capitol reporter

Sen. Ann Rest will be at center of the tax reform debate at the State Capitol.

The New Hope Democrat is chairing the Senate Tax Reform Committee this coming legislative session. The assignment is timely, as Democratic Gov. Mark Dayton and legislative leaders cite tax reform as an important part of their session agenda.

“I think we can accomplish a great deal,” Rest said of the new session, starting Jan. 8.

Rest looks to broaden the base of the Minnesota tax system, lowering rates, closing perceived loopholes, reappraising the tax system in terms of economic development.

In the past, Rest, long engaged in tax policy, has supported expanding the state sales tax to clothing.

Currently, clothing, along with most foods, drugs and medicine for human use, most services, various publications, including newspapers, are exempt from the state sales tax.

Expanding the state’s current 6.875 percent sales tax to clothing alone would collect almost $300 million a year in additional tax revenue.

A sales tax expansion to food would yield almost $700 million a year, with an expansion to services, such as legal, automotive repair, accounting services, bringing in a $1 billion a year alone in additional tax dollars.

Theoretically, by broadening the sales tax base, the state could get its sales tax rate down to perhaps three percent without losing revenue.

Indeed, while Minnesota has the highest sales tax in the five-state area, the state taxes the least in terms of goods.

About 160,000 Minnesota businesses collect and remit the state sales tax.

In 2011, the tax raised $4.66 billion.

That equals about 27 percent of total state tax revenues, with the income tax and property tax — Frans considers the latter tax the most complex in the United States — accounting for 33 percent and 40 percent of total revenue, respectively.

A tweak of one percent on the sales tax affects annual revenue by about $700 million, according to the Minnesota Department of Revenue.

Beyond broadening the state sales tax, Rest has pushed to capture lost Internet tax revenue.

State sales taxes are often not collected on Internet sale purchases unless the retailer has a physical presence in the state.

“To me, this is basic unfairness towards state merchants,” Rest said.

Why should a customer be forced to pay the state sales tax in a store on Main Street and purchase the same goods on the Internet and not pay the tax? Rest asks.

About $400 million in state tax revenue was lost in 2011 in Internet consumer transactions, the state revenue department estimates.

Other Democrats, including incoming House Tax Committee Chair Ann Lenczewski, DFL-Bloomington, like Rest, argue that a tremendous amount of state tax revenue is automatically siphoned away from the revenue stream.

Frans speaks of this “hidden spending,” such as for tax credits, exemptions, deeply rooted in state tax code and difficult to remove.

Out of the annual state tax revenue of $27 billion in 2010, only $16 billion remained after the hidden spending took place, Frans said earlier this year.

While Republican lawmakers indicate a willingness to explore tax reform, they speak of revenue-neutral tax reform.

That is, reforms made without increasing tax revenue overall.

“I’m hoping to work with them,” Rest said of Republicans.

Good ideas don’t come with an “R” or “D” attached to them, she said.

Still, Rest speaks of achieving structural balance within the state budget.

She points to a projected $1 billion budget deficit awaiting lawmakers when they return to the State Capitol.

“I don’t see us making a $1 billion in budget cuts,” Rest said.

Rest noted that changes wrought in Washington to the federal tax system will be of keen interest to her committee.

The committee will await the reforms expected from the Dayton Administration.